One of the risks of being a personal finance blogger is getting ahead of your (readers’) skis.
It’s very easy to go down yet another investing rabbit hole, exploring advanced asset allocation strategies or exploiting yet another niche tax strategy.
It may be fun (at least for people like me) and intellectually challenging – but the reality is that the incremental returns you achieve are marginal at best.
In fact, I’d say that it’s the first 10% of the investing “effort” that will take you 90% of the way to getting rich.
All you need to do is answer the six basic questions below.
Then, set your strategy on autopilot and go back to living (and enjoying) life – because your success as an investor is pretty much guaranteed.
#1: Do You Invest In The First Place?
Let’s start with the most important decision of all – and given you are reading this blog, I hope it’s pretty much a bygone conclusion.
Whether it’s protecting your hard-earned money from inflation, the desire to have your money make more money than you, becoming a millionaire, or even losing your job, there are many reasons to invest in productive, income-generating assets.
And if you think you are too old to start investing, think again. There are plenty of ways to build wealth in both your 40s and your 50s.
In other words, it’s never too late – you just need to make up your mind.
#2: How Much Do You Invest?
The usual mantra in the personal finance community is to “minimize spending, maximize investing”.
If you are solving for the largest nest egg in the shortest possible period of time, this will definitely do the trick.
But if you are solving for actually living an enjoyable, rewarding life, this advice misses the mark entirely.
There are plenty of reasons to spend money today as opposed to tomorrow.
Besides, very few folks can sustain extreme savings rates over long periods of time. Willpower only lasts so long, and chances are your family members might not be as motivated as you.
A much more effective approach is to find a savings rate that works for you – even if it’s just 10% or 20% – and stick with it for a long period of time.
Then, every time you get a raise, earmark 50% of it for spending – and save the other 50%.
Given a long enough time frame, your savings rate will eventually tick up to about 50%, and you won’t ever feel like you’ve ever deprived yourself.
#3: Do You Go Active or Passive?
Once again, no need to be overly dogmatic here.
Yes, there is rock-solid evidence passive investing trumps active money management, no matter what silly things active investors may say.
Still, there are people that beat the market, year after year – and by a large margin.
If you are convinced that you are one of the chosen ones – or just want to try your luck, simply allocate a small (~10%) of your portfolio to active investing, while leaving everything else in a passive fund.
If you are really so good at investing, that actively managed part of your portfolio will soon dwarf your passive investments – and you will retire far earlier than expected, most likely on a nice private island.
And if not, you’ll still be on track for a comfortable retirement, thanks to those good old boring index funds.
#4: Deferred vs Taxable?
If you are new to investing, this may sound a bit intimidating – but it really shouldn’t.
The bottom line is that the government wants you to save for retirement, so it doesn’t have to pay your way through old age.
In order to incentivize you to do so, it provides various tax breaks if you promise not to touch your money until you are older.
Cue in plans like the 401(k) in the US, RRSPs in Canada, or workplace pensions and Lifetime ISAs in the UK. These are all deferred investing vehicles.
Then there are taxable accounts. Here, you don’t get a tax break on the money that goes in – but you can tap that account any time you like, whether it’s to fund early retirement or buy yourself a nice car.
Your regular brokerage would fall into this category.
The decision between deferred vs. taxable accounts should boil down to one question only:
Do you have enough saved up for retirement?
If not, you want to take advantage of the tax breaks until you are in a place where you can comfortably retire by 55 or 60.
Once you get to that place, you can start thinking about the promised land of early retirement – and channel more money into your taxable accounts.
#5: Stocks vs Bonds vs Real Estate
Notwithstanding all the noise out there, retail investors like you and I should have the vast (i.e. 90%+) portion of our investments in one of the three asset classes above.
Real estate is a great way to get rich but it comes with its own challenges.
While I personally scored a couple of home runs here, I’ll be the first one to say that direct real estate is about as “passive” as owning a young puppy (and I’m probably being unfair to puppies here).
That leaves stocks vs bonds.
Owning more bonds will make your portfolio less volatile, but it will also eat into your returns:
Once again, the trick here is to find an allocation that works for you over the long run.
It’s MUCH better to own a 50-50 portfolio that you can hold through thick and thin than go for a 100% equity portfolio that you will liquidate every time the market wobbles – and eviscerate your returns along the way:
In investing, you need to solve for longevity – because it trumps EVERY other factor out there.
#6: US vs International
This is the last investing decision you need to make.
Once you’ve figured out your equity allocation, do you put it all in US stocks or opt for a balanced portfolio of global equities?
Again, the trade-off here is quite simple.
Over long periods of time, US equities tend to deliver higher returns (caveat: the past does not predict the future).
Global equities, on the other hand, have lower returns – but provide more insulation against periods when US equities underperform, like that lost decade during the noughties.
I have a strong bias toward US equities which I think is well-supported by data. However, there’s absolutely nothing wrong with buying yourself a nice world tracker and benefitting from humanity’s progress as a whole.
And that’s… it.
The problem with the money management industry is that if they told you things were that simple, you’d never pay them the egregious fees they want to charge you.
Thus, they choose to overcomplicate and obfuscate, putting unnecessary barriers between you and the kind of life you want to live.
But at the end of the day, investing is simple. It’s not easy, but it’s simple – and your journey to wealth begins with the six simple questions above.
As always, thank you for reading – and happy investing.
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Banker On FIRE is an M&A (mergers and acquisitions) investment banker. I am passionate about capital markets, behavioural economics, financial independence, and living the best life possible.
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8 thoughts on “The Only Investing Decisions That Matter”
Another great article thank you.
Thank you – glad you enjoyed it!
Regarding savings rate I found a combination worked for me . When I was earning less and no dependants I live below my means and concentrated on pensions and always put in 10 to 15% plus the employer match for years.
When my salary rose In my early 30s I increased my pensions and started saving Into an isa . I probably got to about a 40% to 50% savings rate for around 8 years.
I’m now dialling back a bit and trying to live in the now a bit more . Age 42 with £315k in pensions. Still contributing 26% including employer match. Isas at 300k which covers my mortgage at 270k and saving £1000 a month at least .
I figured as long as I’m still adding the pots big enough the markets moves will take care of the growth I need even at modest growth rates. The contributions are now gravy and I’m still taking advantage while I have a high salary as we know this doesn’t always last forever but not trying to knock it out the park anymore rightly or wrongly
Now debating whether to risk buying the dream home. I can run a large interest only mortgage now and keep my isa investments which will cover almost half the mortgage let alone the pension. that feels pretty safe but I’m very risk averse where debts concerned probably too much. Plus the stamp duty feels prohibitive despite the fact a couple of years growth on the new house will wipe it out pretty quickly
So we did something eerily similar. Pretty much pedal to the metal for about 10 years in terms of saving and investing, to the point where pensions, ISAs, and property holdings are big enough to enable a very comfortable retirement at 55 or so.
Now taking a bit of a step back and trying to enjoy life, especially while the kids are young. It mostly starts with dialing back the workload but ultimately translates into a reduction in income and savings.
As I’ve previously written, I’m not as focused on the RE part, so the idea is trying to find a sustainable balance and have fun (professionally and personally) over the next 15 years or so.
Hi BoF, what’s your view on a broad basket of commodities and gold as portfolio diversifiers? I have these in my pf at a 5% allocation each. Do you not feel over-exposed to equities as an asset class?
So I struggle with both commodities and gold given they aren’t productive assets.
The post below articulates my position more clearly, in particular the excerpt below from Mr. Warren B himself:
“Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.)
At $1,750 per ounce – gold’s price as I write this – its value would be $9.6 trillion. Call this cube pile A.
Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with an output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually).
After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?
Beyond the staggering valuation given the existing stock of gold, current prices make today’s annual production of gold command about $160 billion.
Buyers – whether jewelry and industrial users, frightened individuals, or speculators – must continually absorb this additional supply to merely maintain an equilibrium at present prices.
A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops – and will continue to produce that valuable bounty, whatever the currency may be.
Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons).
The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.
Admittedly, when people a century from now are fearful, it’s likely many will still rush to gold.
I’m confident, however, that the $9.6 trillion current valuation of pile A will compound over the century at a rate far inferior to that achieved by pile B.”
Thanks for your reply. Buffet’s analogy isn’t perfect because even the ardent goldbugs would not recommend putting 100% of your portfolio in gold, but I see your point. To be honest, I’m probably guilty of chasing the latest hot thing with commodities and would better off sticking to FTSE Global All Cap. I still believe physical ownership of gold provides a hedge against monetary reset/total financial collapse.
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